Coke Amatil 1H17 result leaves margin of safety

Adam Fleck: Coke Amatil's result was pretty challenged in the first half. The Australian business in particular, which is nearly 60 per cent of the group's earnings, saw continued volume and pricing pressure.

It's not really a secret at this point that Australia is going through a secular decline in carbonated soft drinks. The company also saw pretty sharp pricing pressure from retailers and competition on the water side as well as the carbonated side. For the full year, it looks like it's going to remain down in mid-single-digits for that segment on a revenue basis. But we think there's a potential to turn that business around as you look into fiscal 2018 and beyond.

I think the real two issues at play right now are on the pricing side and on the container deposit side. So, on the pricing side, we think the company is actually going to have some success turning around what is a pretty tough environment from things like new package launches, smaller package sizes that are higher priced per litre, incidence pricing with the Coca-Cola parent company which will really help on marketing and product alignment, as well as new product launches in non-carbonated areas outside of water like juice, for instance.

And then on the container deposit scheme that's gotten a lot of press recently. I think that's a bit overblown. The company is going to have to pass through costs as far as new price to offset some of the additional handling costs with the container scheme, but that will have some volume degradation. But it's going to impact all manufacturers and all products of beverages and I think Coke has an opportunity to offset that with some share gains.

So, all in, we think management's medium-term guidance of mid-single-digit earnings per share growth is appropriate for the consolidated business. The areas outside of Australia, the other 40 per cent of earnings, are still quite positive from a growth and margin perspective, particularly some of the emerging markets. And we think importantly, the market is already pricing in some of this downside. Even if we take a more bearish view on Australia and assume that they are not successful in passing through new prices or turning around that business, it knocks about a $1 off of our $9.40 fair value estimate, which is about where the market is trading the name. So, we see a mild margin of safety right now.